Georgia’s Billionaire Premier on Investor Charm Offensive

By Alan Crosby and Helena Bedwell -
Jan 31, 2013

Georgian Prime Minister Bidzina
Ivanishvili is embarking on a charm offensive abroad as he turns
the legal screws on his political enemies at home.

Stung by American and European Union warnings over arrests
of former officials following his upset victory in October over
the party of President Mikhail Saakashvili, the 56-year-old
billionaire invited executives from companies such as Tata
Motors Ltd. (TTMT) to sit down with him in Davos last week. At the same
time, 19 new Georgian diplomats are fanning out across the globe
to reinforce the government’s pro-investment credentials.

Ivanishvili’s victory was the latest setback in the former
Soviet Union for the U.S. and the EU, which backed Saakashvili’s
Rose Revolution in 2003. Georgia, home to energy links between
Europe and the Caspian Sea that allow oil and gas flowing
westward to bypass Russia, is seeking to ease investor fears
that the peaceful handover wasn’t a mirage.

“It’s becoming an increasingly contentious situation”
even as the transition of power remains mostly peaceful, Svante
E. Cornell, research director at the Central Asia-Caucasus
Institute & Silk Road Studies Program in Stockholm, said by
phone. “Rule of law issues are always a concern for investors
and political instability is a risk for the economy. Georgia
needs to preserve its image right now.”

Russian Education

Ivanishvili, a Russian-trained economist and engineer, is
reaching out to investors to keep markets from turning after the
elections lowered borrowing costs. The yield on the state’s
dollar-denominated bond due in 2021 fell to 4.0898 percent at
6:58 p.m. in Tbilisi, compared with 4.8164 percent a week after
the vote.

Since the new government took power, at least 38 former
officials tied to the previous administration have been charged
with offenses such as illegal wire-tapping and abuse of office
from actions taken before the elections. A graft probe has been
opened into former Defense Minister Davit Kezerashvili, Finance
Ministry investigator Davit Kvinikadze told reporters yesterday
in the capital, Tbilisi.

Saakashvili, who has one year left on his mandate as
president, has called the arrests political payback, while the
U.S., EU and the North Atlantic Treaty Organization have voiced
concerns about perceptions of backsliding on the rule of law.
The government denies the arrests are politically motivated. On
Jan. 13 it released 190 prisoners identified by Parliament as
political detainees jailed by the previous regime.

The government needs to “rectify the troubling human
rights problems it inherited,” while avoiding politically
motivated prosecutions, Human Rights Watch said today in its
World Report 2013.

Exotic Pets

Ivanishvili, known for eccentricities such as having
kangaroos, penguins and zebras for pets, has pledged to continue
to trim the budget deficit while improving conditions to attract
investment and boost growth in the $16 billion economy. About
$195 million flowed into the country in the third quarter of
2012, the lowest quarterly total since the first three months of
2010.

The premier tried to assuage delegates in the halls of the
Davos conference center and at meetings in hotels and other
venues that past impediments, such as a lack of property rights
and competition because of government monopolies, would change
under his administration.

“Davos was very important for us, with loads of meetings
with large global companies,” Giorgi Pertaia, director at the
Georgian National Investment Agency, said by phone from the
Swiss mountain village. “We want to keep their interest. We
need to show there is no danger for their investments.”

Russian Empire

Georgia was incorporated into the Russian empire in the
late 18th century, and enjoyed only three years of independence,
from 1918-1921, until the 1991 collapse of the Soviet Union. It
withdrew from the post-Soviet Commonwealth of Independent States
after losing a five-day war with Russia over a breakaway region
in August 2008.

Russian-Georgian relations were tense even before the war,
which was sparked by Saakashvili’s attempt to regain control of
the enclave of South Ossetia. Putin cut transport and postal
links and blocked money transfers in October 2006 over Georgia’s
arrest of Russian servicemen it accused of espionage.

Georgia, which borders Russia, Armenia, Turkey and
Azerbaijan, hosts the BP Plc-managed Baku-Tbilisi-Ceyhan and the
Baku-Supsa oil pipelines, as well as the Baku-Tbilisi-Erzurum
gas link.

Stalin’s Birthplace

The birthplace of Soviet dictator Josef Stalin isn’t only
looking westward. Ivanishvili has reached out to Russia, where
he made a $6.3 billion fortune in banking and metals, according
to Bloomberg Billionaires Index, to rebuild ties that eroded so
far that President Vladimir Putin once threatened to hang
Saakashvili, a 45-year-old U.S.-educated lawyer, “by the
balls.” Russia welcomes the “positive signals” sent by
Georgia since the elections, Putin said Dec. 20.

“Having better economic relations with Russia will benefit
Georgia’s economic growth,” Sergi Kapanadze, founder of the
Tbilisi-based think tank Georgia’s Reform Associates. “The
threat is not to become overly dependent on the Russian market
as it’s very susceptible to political pressures. Georgia
shouldn’t become dependent on Moscow for energy supplies.”

‘Cautious’ Stance

Ratings company Standard and Poor’s affirmed its BB- credit
score for Georgia last month with a stable outlook, saying the
government’s commitment to fiscal responsibility and market-
oriented policies should spur an economy that grew 6.1 percent
last year. Still, “we remain cautious about political stability
domestically,” it said.

Georgia’s credit rating at S&P, the assessor’s third-
highest non-investment grade, is on par with Montenegro and
Serbia.

Georgia’s vulnerability remains its external financing
position, according to Tim Ash, head of emerging-market research
at Standard Bank Plc in London. He cites a current-account
deficit that reached $454.6 million in the third quarter of 2012
and limited foreign-exchange reserves.

“They need to show to foreign direct investors their
investments are safe and that the broader business environment
is good or improving,” Ash said in an e-mail to Bloomberg. “If
this changes, they could be in trouble.”